What is Consensus Algorithm?

What is a Consensus Algorithm and How does it relate to cryptocurrency?

Consensus algorithms or mechanisms are technological mechanics that involve connecting computers together through the internet, much similar to a system allowing collaborative functions and mutual agreement to ensure the network’s integrity.





Consensus Algorithms and Cryptocurrency



Consensus algorithms are essential to every decentralized network with the underlying technology of blockchain as it connects computers and hardware devices to one another within the network, without the need for a central server like those found in centralized platforms. Blockchain technology has enabled transparency in recording immutable data, which can be accessed by users, but never changed, creating trust within the network of decentralized strangers.





Types of Consensus Algorithms



Each network’s underlying blockchain technology is able to function based on its specific consensus algorithm, which can be categorized as following:





Proof of Work 



Proof-of-Work (PoW) is the world’s first consensus algorithm in the world of cryptocurrency, which is employed on the Bitcoin blockchain network, the coin with the highest market capitalization, dubbed as the “digital gold.”



PoW is a consensus mechanism allowing nodes in a blockchain network to validate transactions and maintain the system’s security through mining, which is accomplished by using computers and hardware devices to solve complex mathematical equations through the consumption of energy to validate transactions and create new blocks.



The first node in the PoW network that is able to solve the equations is provided with mining rewards in the form of the respective network’s coin/token. The news of the successfully mined and validated block will also be broadcasted for other nodes in the network to acknowledge and start on the next upcoming blocks and transactions, further preventing the danger of the network-overriding threat known as the 51% attack.





Proof of Stake 



Proof-of-Stake (PoS) is a consensus algorithm developed to build upon Proof of Work’s shortcomings in excessive energy consumption when mining. As a result, PoS forges new blocks, rather than mining new ones, and also allows nodes to be validators of transactions, rather than miners. Validators are selected randomly based on the amount of staked funds they’d provided, wherein the more one stakes, the higher the chances of being selected.



PoS’s functioning capacity is considerably faster and more cost-efficient than PoW, while still maintaining the safety aspect from 51% attacks or network centralization in the form of mining pools.



It is safe to say that cryptocurrency and blockchain technology’s acceptance is widely-recognized, enabling new networks and coins with newer goals. Networks using PoS can be found to not employ the use of validators based solely on the amount of staked funds, but can depend on additional rules, wherein some networks choose to allow a certain amount of nodes to vote, in order to maintain its system’s transparency.





Conclusion



Consensus algorithms are the core to blockchain networks’ functions in validating transactions and creating new blocks to ensure trust within the decentralized network. Two of the most commonly recognized consensus algorithms are Proof-of-Work (PoW) and Proof-of-Stake (PoS) which create new blocks by mining and validating, respectively. Nonetheless, there are still many other variations, all with different purposes and designs to enhance trust and transparency and reduce threats of systematic security breaches.





Reference:



Investopedia, Ethereum, Section, Binance Academy